It's common knowledge that a bad credit score hurts you when you try to buy a house, but being responsible and avoiding debt can be almost as damaging. Home buyers with no credit scores, which means it's been more than two years since you last carried a credit card balance or had a loan payment, may not be able to take advantage of all the home loan options available. You can still buy a home, though, if you know how to work within the system when you have no credit.
Look At Your Loan Options
Home loans fall into two main categories – conventional and everything else. Conventional loans are issued by a bank and backed by investors. These usually have strict qualification parameters that hinge upon your credit score. Without a credit score, it's difficult to get a conventional loan. You may be able to find a conventional lender that offers non-conforming loans, but these can be difficult to qualify for and they may require additional paperwork or down payment funds.
The everything else category includes FHA, RHS, and VA (for veterans) loans. These loans also have specific requirements. Generally, the home must pass an inspection and you will be paying additional mortgage insurance on the loan. You will have to live in the house, as well, and cannot purchase it to use as a rental property. Your real estate agent can help you find a home that meets the criteria of these loans. If you have no credit and don't have time to build up credit, these are your best options.
Find Sources of Non-Traditional Credit
Whether you qualify for a non-conforming conventional, FHA, RHS, or VA loan, you will still need to prove that you are a good risk. Fortunately, you can do this without a credit score. You will need to undergo a rigorous income verification process, but this is normal for any home loan.
Alternative credit sources will also be required. These include proof of timely rent and utility payments. You must collect proof of these payments, usually from a period of six months to two years, to turn in with your loan paperwork. Each lender may also have further requirements, such as requesting a written borrower statement detailing the reason why you have no credit history.
Build Some Credit – Wisely
Your final option is to build credit. You will receive a credit score as soon as you open a line of credit and it begins reporting. It can take between six months and two years for your credit score to pass muster, depending on the lender's requirements. The best way to build credit is to open one or two credit cards and use them monthly. You can also take out a small personal or auto loan to begin building a score.
Don't fall into the credit trap, though. Pay off your balance monthly so you don't accrue interest. If the card only reports to the credit bureaus when you carry a balance, then only carry $10 over each billing cycle. This will keep your interest payments low while still giving you the opportunity to fix your no credit problem.
For more information about mortgage loans and your options, contact a company like Ebh Properties Inc.